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Should You Name a Trust as an IRA Beneficiary?

An IRA may not be placed into a trust while the account owner is alive. An IRA also may not be owned by more than one person. The IRA owner can name a trust as a beneficiary of an IRA. Just because you can do this, does not mean it is a good idea, says the article “Naming Your Trust as an IRA Beneficiary” from The Press of Atlantic City. The IRA owner could also take all of the funds and deposit them into a trust, but that would be another bad idea. Why? It is because all of the funds withdrawn would be subject to income tax.

Therefore, why would anyone want to name a trust as the beneficiary for an IRA?

• If you want an heir, like a second spouse, to inherit the income but not the balance of the principal after you have died. This is done so the second spouse cannot name their children as the beneficiary, instead of the original account owner’s children.
• If you are concerned with the ability of heirs to manage your IRA funds wisely, a trust can be the beneficiary and you can set the terms with which the heirs can have access to the funds.
• Minor children cannot be direct beneficiaries of an IRA, and a disabled child may become ineligible for government benefits, if he or she receives an inheritance directly.
• If you want your IRA funds to be inherited by grandchildren instead of children, a trust is the way to go.
• If creditor protection is a concern under the laws of your state, a trust would keep the IRA funds from being tapped by claims of creditors.

Here is why you would NOT want to name a trust as the beneficiary of your IRA:

• There are no tax benefits to having the trust inherit your IRA.
• Trusts have expenses. Trustee fees and tax rates on funds left inside the trust, but not in the IRA, may be substantially higher than personal income tax rates, depending on the beneficiary.
• The trust will have to keep going long after your own death. That means tax returns must be filed, fees paid, and the trustee must maintain the trust.
• Some companies that hold IRAs do not allow trusts to be beneficiaries of IRAs. Before you get into figuring out if this is the right route for you, find out first if your custodian will permit it.

There are many other facts to consider before deciding to name a trust as the beneficiary of an IRA. Speak with your estate planning attorney to see if it is a suitable solution for you and your family.

Reference: The Press of Atlantic City (February 13, 2020) “Naming Your Trust as an IRA Beneficiary”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Thinking Ahead for 2020 Elections

Trying to anticipate changes in the tax codes is like trying to time the stock market—a nearly impossible task. Most tax pundits guessed right, when they said that President Trump was going to cut corporate tax rates in 2017, but the doubling of estate and gift tax exemptions to more than $23 million was a surprise. So was the elimination of deductions for state and local taxes, as reported in The New York Times article “2 Strategies to Consider Ahead of the 2020 Election.”

With a presidential election coming up this fall, the challenge of predicting the impact of changes that may affect taxpayers and their estate planning has already begun. Candidates are talking about big changes, like health insurance, climate change and infrastructure. They are also talking about changes to wealth tax, but what no one has covered yet are changes like lowering exemptions and raising rates for estate and gift taxes and ending the valuation discount for closely held family businesses. This is a tax break that lets families transfer their businesses for far less than they are worth.

This valuation can impact any small business that owners expect to transfer to heirs. The current exemption levels for estate and gift taxes are so high now, that this tax only applies to very few people. However, if the exemption levels and tax rates change, that could become a problem for business owners.

The estate tax is now in effect until 2025, with exemptions at $11.58 million for an individual, and  double that amount for a couple. Everything above that is taxed at a rate of 40%. Lowering the exemption and increasing the tax rate are on some candidate’s agendas, both to raise revenue and address income inequality.

The estate tax is a big target. This is because if the exemption were lowered, it would generate a good amount of income, and impact a relatively small group of Americans. The likelihood of this happening will depend on election results, both at the presidential and congressional levels.

The months before the election occurs may be a good time to take advantage of the high tax exemptions and valuation discounts, just in case they change. This would let business owners pass more of their wealth to heirs free of tax, and could also settle some business issues now, not later, when the owners die.

However, identifying short and long-term goals should be done before making any significant decisions. In some states, like Connecticut, it may not be necessary to plan so aggressively, because the state’s estate and gift tax exemptions are lower than federal ones. It should be noted, however, that the exemptions are set to become equal in 2023.

Eliminating the valuation discount had been proposed by the Treasury Department and the IRS under President Obama, when these discounts were seen as being overly generous. A few months after taking office, President Trump issued an executive order for the Treasury to withdraw the regulation to eliminate the discount. However, the statute is still on the books and could be easily reinstated.

This is an example of the importance of reviewing estate plans on a regular basis and creating estate plans that have enough flexibility to withstand change. Speak with your estate planning attorney to ensure that your estate plan is prepared, whatever the results of the 2020 elections may be.

Reference: The New York Times (Feb. 14, 2020)

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Will Your Estate Plan Work Now?

The demise of the stretch IRA is causing many IRA owners and their advisors to take a look at how their estate plans will work under the new law. An article from Financial Advisor titled “Navigating The New Estate Planning Realities” offers several different planning alternatives.

Take larger IRA distributions during your lifetime. If possible, take the IRA distributions and reinvest them in a Roth IRA or other assets that will receive a stepped-up income tax basis on the death of the account owner. The idea is to take out significant additional penalty-free amounts from IRAs during your lifetime, so you will hopefully be taxed at a lower rate than you would be otherwise, with the net after-tax funds then reinvested in either a Roth IRA or other assets that will receive a stepped-up income tax basis when you die.

Paying all or part of the IRA portion of the estate to lower-income tax bracket beneficiaries. The theory here is that if we have to learn to live with the new tax law, at least we can attempt to minimize the tax pain by doing estate planning with a focus on tax planning. If a person has four children, two in high-income tax brackets and two who are in lower tax brackets, leave the IRA portion of the assets to the children in the lower tax brackets and assets with a stepped-up basis to the higher earners.

Withdrawing additional funds early and using the after-tax amount to purchase income-tax-free life or long-term care insurance. Rather than withdrawing all of the IRA funds early, freeze the current value of the IRA, by withdrawing only the account growth or the RMD portion, whichever is greater. Note that this won’t work if the withdrawals push the person’s income into the next higher tax bracket. All or a portion of the after-tax withdrawals then go into an income-tax-free life insurance policy, including second-to-die life insurance that pays only upon the death of both spouses.

Paying IRA benefits to an income tax-exempt charitable remainder trust. This involves designating an income-tax exempt charitable remainder trust as the beneficiary of the IRA proceeds. Let’s say a $100,000 IRA is made payable to a charitable remainder unitrust that pays three adult children or their survivors 7.5% of the value of the trust corpus (determined annually) each year, until the last child dies. Assume this occurs over the course of 30 years, and that the trust grows at the same 7.5% rate for the next twenty years. The children would net nearly $400,000. Note that the principal of the trust may not be accessed, until it’s paid out to the children, according to the designated schedule.

Every situation is different, so it is important to sit down with your estate planning attorney and review your entire estate, tax liabilities under the new law and how different scenarios will work to both minimize taxes during your lifetime and for your heirs. It’s possible that your situation benefits from a combination of all four strategies.

Reference: Financial Advisor (Feb. 11, 2020) “Navigating The New Estate Planning Realities,”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

The High Cost of Medicare Mistakes

A 68-year-old woman knew that she had to sign up at age 65 for Medicare Part A for hospital care and Part B for outpatient care, since she did not have employer provided health insurance from an employer with 20 or more employees. She knew also that if she did not have health insurance from an employer and didn’t sign up immediately, she’d face a penalty with higher Part B and Part D premiums for the rest of her life when eventually she did sign up, reports Forbes in the article “Beware Medicare’s Part B Premium Penalty And Surcharge Traps.”

Here’s where it got sticky: she thought that Medicare provided an eight-month special enrollment period after one job ended to apply penalty free. She is employed on a sporadic basis, so she thought she had a window of time. Between the ages of 65 and 68, she had several jobs with large employers, and was never out of work for more than eight months.

She was out of work for 25 months total between ages 65 and 68, when she was not enrolled in Medicare. She thought that since she was never out of work for more than eight months, she didn’t have to sign up until she officially stopped working and would then enroll penalty free in traditional Medicare Parts A, B, and D.

She had read information on the Medicare website and her interpretation of the information was wrong. It was a costly mistake.

In determining whether you need to permanently pay a Medicare Part B penalty, Medicare counts up all the months between age 65 and the month you first enroll in Part B, even if you have a job with a large employer with no gaps in employment for more than eight months.

She got hit with a 20% lifetime Medicare Part B premium penalty. For every 12 months that you’re not covered by Medicare B after reaching 65 and before you enroll, the penalty is an additional 10%. And making things worse, she was hit with a Medicare Part B penalty based on the cumulative (not consecutive, which is an important difference) 25 months that she went without credible prescription drug coverage.

This is the sort of problem that does not self-resolve or get better over time. In this case, another mistake in timing is going to hurt her. She sold some assets and realized a capital gain in 2018, which increased her Modified Adjusted Gross Income (MAGI). In 2020, she’s going to have to pay the Income Related Monthly Adjustment Amount (IRMAA). If your MAGI, two years before the current year, is less than $87,000, you are exempt from IRMAA in the current year. Her cost: $1,735.20 more this year. Had she instead realized those capital gains over the course of several years, her 2018 MAGI might not have crossed the $87,000 threshold. Most people are not aware of the IRMAA and take capital gains in larger amounts than they need.

This is a harsh lesson to learn, at a time in life when there’s not a lot of flexibility or time to catch up. Talking with an estate planning lawyer about Medicare and about tax planning, as well as having an estate plan created, would have spared this woman, and countless others, from the harsh consequences of her mistakes.

Reference: Forbes (Jan. 29, 2020) “Beware Medicare’s Part B Premium Penalty And Surcharge Traps”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

How an Experienced Estate Planning Attorney Helps People

People turn to estate planning attorneys, when they are ready to create a set of instructions for what they would like to happen to their assets when they die, explains Vents Magazine’s recent article, “Understanding What an Estate Planning Attorney Does.” The estate planning attorney creates a will, also known as a last will and testament to accomplish this, but that’s just part of what they do.

An estate planning attorney also helps to plan for incapacity, when a person cannot speak for themselves because of an injury or an illness. She also helps you understand estate taxes.

An estate planning attorney will also help to make certain that all of your savings and property are safe and distributed through the proper legal processes.

Estate planning attorneys assist with the power of attorney and health care directives. These documents allow you to designate an individual to decide issues on your behalf, in the event that you become mentally incapable of making decisions for yourself. They can also help you with a guardian who will look after your estate.

It’s important that you select the right estate planning attorney to execute the legal process, as you’ve instructed in your estate plan. You should only retain an attorney with experience in this field of law because other legal counsel won’t be able to help you with these issues—or at least, they may say they can, only to find out later that they’re not experienced in this area.

You also want to feel comfortable with your estate planning attorney because you must disclose all your life details, plans, and estate issues, so she can create an estate plan that’s customized to your circumstances.

By selecting an experienced estate planning attorney, you save your family from unnecessary stress and costs. If there is no will, the entire estate is handled by the courts, which also takes a considerably longer time than if a will was properly prepared. If no estate plan exists, there may also be additional taxes.

Reference: Vents Magazine (December 12, 2019) “Understanding What an Estate Planning Attorney Does”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

How Does a “Senior Freeze” Work?

In some families, a decision is made to transfer the parent’s home to their children through the use of a life estate. It’s used to help parents become eligible for certain government benefits, among other estate planning purposes. However, this could cause parents to lose their ability to receive the Senior Freeze, which reimburses eligible seniors and disabled people for increases to property tax or mobile home park site fees.

As far as property with a life estate, nj.com’s recent article, “Will I get the Senior Freeze if I have a life estate for my home?” explains that it’s important to determine who remains the owner of the property. The article says that the Senior Freeze program is a bit of a misnomer, because the benefit doesn’t actually “freeze” property taxes. The program actually reimburses eligible individuals for any property tax increases incurred, once an individual qualifies for the benefit.

An eligible person gets the difference between the property tax amount in the first year of eligibility—the “base year”—and the current year’s property tax amount, presuming it is higher. For example, in New Jersey, a person has to have two consecutive years of eligibility before applying and satisfy the following requirements:

• The applicant or his/her spouse are at least 65 or receiving Social Security disability benefits;
• The applicant lived in the state continuously since Dec. 31, 2007, or earlier, as a homeowner or renter;
• The applicant owned and lived in his/her home since Dec. 14, 2014 or earlier (and still owns and lives in the home);
• He or she has paid the full amount of the property taxes due; and
• The applicant meets the income limit (currently $89,013 in NJ).

The program typically doesn’t apply to vacation homes, second homes, rental properties, or properties that have more than four units.

It’s not uncommon for seniors to transfer a home to a trust for a variety of purposes, including government benefit planning. However, conveying your home entirely may disqualify you from the Senior Freeze program. An applicant is considered the owner of the property, if she retains a life estate in the property, which must be evidenced in the deed or other legal document showing the applicant’s right to occupy the property.

Before transferring any real estate or making any large gifts, talk with an estate planning elder law attorney. While the retention of a life estate may let an applicant qualify for the Senior Freeze if other qualifications are met, it may have a bigger impact on other benefits.

Reference: nj.com (December 11, 2019) “Will I get the Senior Freeze if I have a life estate for my home?”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Billionaire Paul Allen’s Estate Remains a Private Matter

The only thing known about Paul Allen’s intentions for his fortune, estimated to be in the area of $20 billion, was that he intended to give away much of it. He was interested in everything from nonprofits, fine art, science and pop culture, among many other endeavors. It’s been a little more than a year since the died, and little is known about what is happening with his estate.

The Seattle Times’s recent article, “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated” says that it can take years to unwind holdings like Allen’s.

The process of giving away as much as $10 billion or more of his estate falls to Jody Allen, trustee, sister and, with her family, sole heir.

Jody Allen “has responsibility for preserving and implementing Paul Allen’s vision for generations to come,” says her biography on the website of Vulcan, the business they co-founded that serves as the hub of the Allen empire.

Jody’s specific intentions are not known outside of her inner circle. However, the expectations are great, based in large part on Paul and Jody Allen’s record of philanthropy. Paul gave away about $2 billion, while he was alive.

The sale of Allen’s cash-consuming assets, like yachts or space ventures, is a regular task in cleaning up an estate, so that when it’s time to distribute cash, there’s liquidity.

However, this clean-up can take several years for estates of this size. Estates have up to 15 months from the date of death, including extensions, to file estate tax returns.

For estates this size, the executor must pay estimated taxes, which can be as much as 52% of assets that are not being donated to nonprofit organizations. Major distributions cannot be made until both federal and state tax officials sign off. Once that occurs, the executor will be able to move forward with distributing assets or whatever the estate plan directs.

Reference: The Seattle Times (November 26, 2019) “What’s happening to Paul Allen’s billions? A year after his death, it’s complicated”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Can Inheritance Taxes For A Step-Grandchild be Avoided?

New Jersey is one of several states that still have an inheritance tax, reports an article from nj.com, “How can I avoid the inheritance tax for step-grandchildren?” Whether or not an inheritance tax is levied, depends upon the level of kinship between the decedent and their beneficiaries. There are four categories of kinship.

Most inheritors fall into Class A. This category includes a spouse, child, parent, grandparent, stepchild, and grandchild. The next most common category is Class C—siblings and daughters-in-law or sons-in-law, and the surviving spouse of a deceased child are included here. Class E beneficiaries include charities, religious institutions and other exempt organizations. Finally, there’s Class D. These beneficiaries includes anyone who’s not a member of another class. In case you’re wondering, there’s no longer a Class B.

Class A beneficiaries will not see any inheritance tax. For Class C, the first $25,000 is exempt and the rate on amounts in excess of that begins at 11% and goes up to 16%. Class D rates range from 15 to 16%. There’s no inheritance tax for Class E.

Step-grandchildren are considered Class D beneficiaries, despite the fact that grandchildren and stepchildren are Class A beneficiaries. You can avoid the tax, by leaving life insurance death benefits to a step-grandchild, because these benefits aren’t subject to New Jersey’s inheritance tax. If the step-grandchild is the stepchild of your child or the child of your stepchild, leave the bequest to your child or your stepchild and make an unenforceable request that she use the bequest for that step-grandchild.

Another option is to make a gift to the step-grandchild, while you’re living. If the gift is made more than three years before your death, then it won’t be subject to the inheritance tax. However, if it’s within that three-year period, there’s a presumption that the gift was made in contemplation of death, so it will be subject to inheritance tax.

You could avoid this, by making a lifetime gift to your child or stepchild, even within the three-year period preceding death, and request that they use it for the benefit of the step-grandchild. The only issue here is that it's not an enforceable obligation. Otherwise, the gift will be deemed to have been made to the step-grandchild and subject to the three-year gift in contemplation of death rule.

Real estate property located outside of New Jersey that is owned by a New Jersey resident might be a good asset to leave to a step-grandchild. New Jersey’s inheritance tax is not applied to out-of-state real estate.

Reference: nj.com (October 31, 2019) “How can I avoid the inheritance tax for step-grandchildren?”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

The Downside of Moving Retirement Money to a Roth

The question to ask yourself about retirement savings and taxes is simply this: when do you want to pay taxes? You can pay taxes during retirement with a traditional IRA. Or, you can roll your IRA money into a Roth IRA and pay taxes now. However, is there a reason not to put all of your money into a Roth IRA, besides the immediate taxes?

CNBC’s recent article, “Moving all your IRA money to a Roth means losing some tax benefits,” says that those lost tax benefits generally relate to medical expenses, charitable contributions and business losses. By contrast, if you leave too much in the IRA, the result may not be good. You may have higher required minimum distributions and taxes.

Roth IRAs grow tax free and withdrawals generally are also untaxed. They also have no lifetime required minimum distributions, or RMDs. However, traditional IRAs have some potential tax benefits that are gone for good, once the money is moved.

The primary concept in managing taxes in retirement is that you want to get as much money out of your accounts at the lowest possible cost. When you roll over money from a traditional IRA to a Roth, the amount moved is taxed as ordinary income. As a result, you should complete the rollover when you’re in as low a tax bracket as possible. This means tax-free income available down the road, but it also means you’ll have already paid taxes on the rollover. Thus, there’s no opportunity to reduce your rate further. However, if you leave too much in the IRA, the result may not be good. If you think that you might have these future expenses, then it might make sense to keep money in the traditional IRA.

Medical expenses. These is usually a major expense for older Americans and doesn’t include the cost of long-term care. However, a tax break for medical expenses is one of the few remaining deductions available to individuals, since the new tax law in 2018. It’s limited to the amount that exceeds 10% of your adjusted gross income and you must itemize your deductions to take advantage of it. However, those with high medical bills can potentially reduce their taxes by applying it. To take the deduction, you must have taxable income to weigh it against. So, if much of your income is coming from a Roth IRA tax-free, you could be restricted in whether you can take advantage of the break. If you took money from an IRA (whose withdrawals are taxed as ordinary income) to cover those health costs, you could use the medical deduction against that withdrawal. This could result in paying less in taxes than what you had paid by rolling that money to a Roth.

Qualified charitable distributions. If you give money to charity each year, keeping money in your traditional IRA to make those donations could be wise, because contributions made through qualified charitable distributions — funds sent directly to the charity from a traditional IRA — are excluded from your taxable income. However, the tax break for charitable contributions can only be used if you itemize your deductions, and generally, a deduction isn’t as valuable as an income exclusion. Note that this strategy is only available to IRA owners and beneficiaries who are age 70½ or older. Since that is the age when RMDs kick in, the move could reduce your tax liability on the RMD to zero. If your RMD is $5,000, but you give $5,000 to charity anyway, do the qualified charitable distribution, and you don’t have to pick up any of the income.

Business losses. These can only be claimed on your tax return, if you have income to claim them against.

General tax considerations. No matter your overall income, any amount that falls into each of seven defined brackets is taxed at a specific rate. Therefore, the more income you can get taxed at those lower rates, the better. If you could leave some money in the IRA to soak up some of those lower tax rates in the future, you may pay less in taxes on the money than if you converted it.

Tax rates may be low now, but they are going to revert back to pre-2018 levels at the end of 2025, when the current tax law sunsets. So chances are good that after 2025, they’ll be higher.

The way to get the most from your money, is to minimize your taxes, especially in retirement.

Reference: CNBC (November 27, 2019) “Moving all your IRA money to a Roth means losing some tax benefits”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Celebrity Estate Planning Success Story: Luke Perry

Luke Perry will long be remembered as the romantic figure on the popular show Beverly Hills 90210. However, he may also be remembered as a money-savvy celebrity, who had an excellent estate plan in place.

Forbes’ recent article, “How Luke Perry’s Estate Maximized This Unique California Tax Shelter,” says that media outlets have reported that Perry’s $2 million home in the Los Angeles area had been transferred from his revocable trust to his two children in equal shares. This can be a normal part of the estate administration process, if you are working with an experienced estate planning attorney. However, it also shows some additional sound planning on his family’s part. It looks like the actor’s children took advantage of a unique tax loophole in California, the parent-child property tax exemption. Therefore, they’d have inherited their father’s property tax base, which is an important financial benefit in California, because the home has increased in value significantly since Perry bought it.

The parent-child exclusion gives California property owners some unique benefits, so with proper planning, property can be passed on to the next generation. Note that these rules are complex and must be followed carefully, to avoid accidently triggering reassessment.

In 1978, California voters approved Proposition 13, which rolled back property tax values for existing homeowners to their 1976 value. For new purchases, the property tax rate was set at 1% of the purchase price and increases to the property tax base were limited to 2% per year. In 1986, California passed Proposition 58—a constitutional amendment that excluded from reassessment transfers of real property between parents and children. Therefore, when a child inherits their parent’s home, they can also inherit the parent’s property tax base.

While both propositions independently create property tax relief, when combined, it can have extraordinary benefits. Assume that you bought a home for $100,000 in 1979. The property tax base would have been established at 1% of the purchase price ($1,000). This property tax base 40 years later in 2019 would be $2,208. Now, let’s say the $100,000 home has increased its fair market value to $1,000,000. If the owner dies and the property is transferred to their child, their child would inherit the parent’s property tax base of $2,208, and that rate would continue to grow at the 2% rate.

However, this loophole is complicated because the exclusion allows the transfer up to $1 million of assessed value (and each spouse of a married couple has $1 million to allocate). The assessed value is merely the property tax base, not the fair market value. As a result, provided the assessed value stays within the $1 million of assessed value, parents can transfer property that has increased by millions of dollars. As you can imagine, these rules can have a major effect on beneficiaries. The ability to inherit a parent’s property tax on a home that has increased in value, might result in keeping the family home, instead of having to sell it.

Experienced estate planning lawyers create a private and tax efficient estate plans for their clients every day, even those who are not romantic Hollywood stars.

Reference: Forbes (November 14, 2019) “How Luke Perry’s Estate Maximized This Unique California Tax Shelter”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899